“No man is an island entire of itself,” wrote John Donne. Four centuries on, he might have included women, but the sentiment holds. We are inter-dependent—our fortunes intertwined—which makes the pension system we’ve built since the 1980s disturbing. The drift has been towards individuals taking their chances with a personal pension pot. It is as if we were financial islands cut off from one another.
That’s why proposals being jointly pushed by Royal Mail and the Communication Workers Union, to create a new kind of company pension—known as Collective Defined Contribution—are worth watching.
Old workplace pensions guaranteed an income for life linked to final salaries. When retirements were shorter, workers paying into the schemes outnumbered pension- ers taking out, and this worked well. But as lives got longer the balance got out of kil- ter, and companies stopped offering those increasingly expensive guarantees.
We became islands. By shifting to “Defined Contribution” schemes where all that is certain is what you pay in, employees save in their separate pots, and if investments underperform they are on their own—and in for a penurious old age. Too much risk falls on each of us, with too lit- tle incentive to trust the system and pay in.
Employers don’t want to go back to final salary pensions, but some are look- ing for a middle ground that lets them give workers a firmer indication of what to expect without offering cast-iron guarantees. The idea is to pool individual risk into a collective scheme, cushioning everyone against the worst outcomes of retiring at the “wrong time”—like after a stock market crash.
Ministers have promised a consultation on Collective Defined Contribution. There will be complications to overcome—not least how to reconcile this measure of collectivism with the individual “pension freedom” we’ve also been promised. But the greater good is surely a system that does not force us to stand alone.
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